12.1 Overview of the Economy
• Sociologists deﬁne economy as the social institution that organizes the production,
distribution, and consumption of a society's goods and services.
The economy is not the same as government, which is the social institution through
which power is distributed and exercised.
• The economy is composed of 3 sectors:
• The primary sector is the part of the economy that takes and uses raw materials
directly from the natural environment. Its activities include agriculture, ﬁshing,
forestry, and mining.
• The secondary sector of the economy transforms raw materials into ﬁnished
products and is essentially the manufacturing industry.
• The tertiary sector is the part of the economy that provides services rather than
products; its activities include clerical work, health care, teaching, and information
• Generally speaking, the less developed a society's economy, the more important its
primary sector; the more developed a society's economy, the more important its
• As societies developed economically over the centuries, the primary sector became
less important and the tertiary sector became more important.
Types of Economic Systems
• Capitalism and Socialism
• Capitalism is an economic system in which the means of production are privately
owned. By means of production, we mean everything—land, tools, technology, and so
forth—that is needed to produce goods and services.
• the most important goal of capitalism is the pursuit of personal profit
• Businesses try to attract more demand for their products in many ways, including
lowering prices, creating better products, and advertising how wonderful their
products are. In capitalist theory, such competition helps ensure the best products at
the lowest prices, again benefiting society as a whole. Such competition also helps
ensure that no single party controls an entire market.
• According to Smith, the competition that characterizes capitalism should be left to
operate on its own, free of government intervention or control. For this reason,
capitalism is often referred to as laissez-faire (French for “leave alone”) capitalism,
and terms to describe capitalism include the free-enterprise system and the free
• The hallmarks of capitalism, then, are private ownership of the means of production,
the pursuit of profit, competition for profit, and the lack of government intervention in
• Socialism is an economic system in which the means of production are collectively
owned, usually by the government. The most important goal of socialism is not the pursuit of personal profit but rather
work for the collective good: The needs of society are considered more important than
the needs of the individual. Because of this view, individuals do not compete with each
other for profit; instead they work together for the good of everyone. If under
capitalism the government is supposed to let the economy alone, under socialism the
government controls the economy.
• The ideal outcome of socialism, said Marx, would be a truly classless or communist
society. In such a society all members are equal, and stratiﬁcation does not exist.
Comparing Capitalism and Socialism
•It produces greater economic growth and productivity, at least in part because it
provides more incentives (i.e., profit) for economic innovation. It also is often
characterized by greater political freedom in the form of civil rights and liberties.
•There is much more economic inequality in capitalism than in socialism. Although
capitalism produces economic growth, not all segments of capitalism share this
growth equally, and there is a much greater difference between the rich and poor
than under socialism. People can become very rich in capitalist nations, but they
can also remain quite poor.
•More generally, capitalism is said by its critics to encourage selfish and even greedy
behavior: If individuals try to maximize their profit, they do so at the expense of
others. In competition, someone has to lose.
• Some nations combine elements of both capitalism and socialism and are called social
democracies, while their combination of capitalism and socialism is called
democratic socialism. In these nations, which include Denmark, Sweden, and
several other Western European nations, the government owns several important
industries, but much property remains in private hands, and political freedom is
widespread. The governments in these nations have extensive programs to help the
poor and other people in need. Although these nations have high tax rates to help
finance their social programs, their experience indicates it is very possible to combine
the best features of capitalism and socialism while avoiding their faults
The US Labor Force
• The civilian labor force in the United States consists of all noninstitutionalized
civilians 16 years of age or older who work for pay or are looking for work.
• Approximately 87 million Americans ages 16 and older are not in the labor force. Of
this number, 93 percent do not desire a job. Most of these individuals are retired,
disabled, or taking care of children and/or other family members. Of the 7 percent
who would like a job but are still not in the labor force, most have dropped out of the
labor force (stopped looking for a job) because they have become discouraged after
previously looking for work but not finding a job.
12.2 Sociological Perspective on Work and the Economy
• Functionalism - Work and the economy serve several functions for society. The
economy makes society possible by providing the goods and services it needs. Work gives people an income and also provides them some self-
fulﬁllment and part of their identity.
• Conﬂict Theory - Control of the economy enables the economic elite to
maintain their position at the top of society and to keep those at the bottom in
their place. Work is often alienating, and the workplace is often a site for sexual
harassment and other problems.
•Work has important, nonmaterial functions beyond helping us pay the bills. Many
people consider their job part of their overall identity.
•Many people have friends and acquaintances whom they met at their workplaces or
at least through their work (McGuire, 2007). Coworkers discuss all kinds of
topics with each other, including personal matters, sports, and political affairs, and
they often will invite other coworkers over to their homes or go out with them to a
movie or a restaurant. These friendships are yet another benefit that work often
• Conflict Theory:
•Although work can and does bring the many benefits assumed by functionalist
theory, work can also be a source of great distress for the hundreds of thousands of
women and men who are sexually harassed every year.
• In the 2010 GSS, 88 percent of respondents said they are “very” or “somewhat”
satisfied with the work they do, and only 12 percent said they were dissatisfied.
This latter figure is probably much lower than Marx would have predicted for a
capitalist society like the United States. One possible reason for this low
amount of job dissatisfaction, and one that Marx did not foresee, is the number
of workplace friendships as described earlier. Such friendships can lead workers
to like their jobs more than they otherwise would and help overcome the
alienation they might feel without the friendships.
12.3 Problems in Work and the Economy
The Loss of Jobs and Wages
• Even before the deep recession in 2007, there was a loss of jobs and stagnating wages
• The US has joined other industrial nations in moving into a postindustrial economy.
In a postindustrial economy, information technology and service jobs replace the
machines and manufacturing jobs that are hallmarks of an industrial economy. If
physical prowess and skill with one’s hands were prerequisites for many industrial
jobs, mental prowess and communication skills are prerequisites for postindustrial
• Since the 1980s, many manufacturing companies moved their plants from US cities to
sites in the developing world in Asia and elsewhere, a problem called capital flight.
Along with the faltering economy, these trends have helped fuel a loss of 5.5 million
manufacturing jobs from the American economy since 2000
• A related problem is outsourcing, in which US companies hire workers overseas for
customer care, billing services, and other jobs that Americans used to do. China, India, and the Philippines, which have skilled workforces relatively fluent in English, are the
primary nations to which US companies outsource their work.
• While the average compensation of chief executive officers (CEOs) of large
corporations grew by 167 percent from 1989 to 2007, the average compensation of the
typical worker grew by only 10 percent
The Decline of Labor Unions
• Labor strife also marked the Great Depression, when masses of people blamed
business leaders for their economic plight. Huge sit-ins and other labor protests
occurred at auto plants in Detroit. In response, the Congress passed several laws that
gave workers a minimum wage, the right to join unions, a maximum-hour workweek,
and other rights that Americans now take for granted.
• Labor unions have intensified their efforts to increase their membership, only to find
that US labor laws are filled with loopholes that allow companies to prevent their
workers from forming a union. For example, after a company’s workers vote to join a
union, companies can appeal the vote, and it can take several years for courts to order
the company to recognize the union. In the meantime, the low wages, substandard
working conditions, and other factors that motivated workers to want to join a union
are allowed to continue.
• The decline of unions has lowered wages: First, union workers earn about 14 percent
more than nonunion workers (controlling for experience, education, occupation, and
other factors), a phenomenon known as the union wage premium. Because fewer
workers are now in unions than four decades ago, they are less likely to benefit from
this premium. Second,